SK Innovation makes history with Australia LNG venture, securing 1.3 million tons a year

Darwin sits at the northern tip of the Australian continent. About 40 minutes from the city center lies a 660,000-square-meter LNG plant — and another 10-minute walk from the main gate brings visitors to a sprawling complex of interlocking pipelines and dozens of towering storage tanks.

Inside the plant, machinery roars as workers strip moisture, mercury and carbon dioxide from natural gas — the first stage in converting it into LNG. The chemicals needed for that process are stored on-site, while the natural gas itself arrives from the Barossa gas field, located more than 300 kilometers offshore, via a floating production, storage and offloading vessel. Ships carrying gas from the Barossa field call at the Darwin LNG plant every eight days.

Once impurities are removed, the natural gas moves directly through pipelines into a three-stage liquefaction process, using propane, ethylene and methane as refrigerants at each stage. The resulting LNG, chilled to minus 162 degrees Celsius, is stored in tanks roughly 50 meters tall — just a minute's walk from the processing facility.

The plant produces 3.7 million tons of LNG per year. SK Innovation E&S takes 35 percent of that, or 1.3 million tons — equivalent to about 3 percent of South Korea's annual LNG imports. When combined with volumes from the Woodford shale gas field and the Freeport LNG terminal in the United States, SK Innovation E&S's total annual LNG supply rises to 6 million tons.

The Darwin LNG plant previously liquefied gas from the Bayu-Undan field. After that field ceased production, the facility underwent more than two years of refurbishment before being repurposed as the liquefaction and export hub for the Barossa gas field — the centerpiece of SK Innovation E&S's Barossa Project.

The Barossa Project is an offshore gas field development venture off northern Australia that SK Innovation E&S joined in 2012. Santos of Australia holds a 50 percent operating stake, SK Innovation E&S holds 37.5 percent, and Japan's JERA holds the remaining 12.5 percent.

When the project began, SK Innovation E&S had confirmed natural gas reserves of 1.3 trillion cubic feet. The company drilled five appraisal wells to boost the field's development value, ultimately raising confirmed reserves to 3.4 trillion cubic feet.

"It is no easy feat for a private company to stay committed to a single project for 14 years," said Kim Hyun-jun, a technical adviser at SK Innovation E&S's LNG business division. "The project was initially expected to proceed as a mini-LNG venture, but drilling expanded its scale considerably."

SK Innovation E&S has invested $1.6 billion in the project, covering reserve assessment, permitting, and the construction of offshore and onshore facilities. The venture was not without its skeptics — resource development projects require enormous capital with no guarantee of commercial production, and the COVID-19 pandemic in 2020 added further risk.

"We completed detailed engineering in February 2020, but when COVID-19 hit that year, every logistics chain ground to a halt and raw material prices surged," Kim said. "We pushed the final investment decision back a year, to 2021."

Despite those setbacks, the Barossa Project has reached full stride and delivered its first results this year. The first LNG cargo was produced in January, and in February it was shipped to South Korea and unloaded at the LNG terminal in Boryeong, South Chungcheong Province. Last month, 300,000 barrels of condensate were brought into South Korea and fed into facilities at SK Incheon Petrochemical. It marks the first time a South Korean private company has participated in an overseas resource development project from its earliest stages through to successful LNG production.

The Barossa Project's greatest advantage is the stable LNG supply it provides. The Strait of Hormuz, which once handled 20 percent of global LNG supply, has in effect lost its role as an energy transit route amid the Middle East war. Although LNG shipments partially resumed after the United States and Iran reached a temporary agreement in June, traffic through the strait remains negligible. For South Korean energy companies that had relied heavily on the Middle East, securing a stable alternative supply source has become urgent.

The Barossa Project eases that concern for SK Innovation E&S. Australia carries far less geopolitical risk than the Middle East. Given that gas fields typically produce for about 20 years, the maximum volumes SK Innovation E&S stands to secure from the project reach 26 million tons of LNG and 22 million barrels of condensate.

"Our LNG portfolio is a mix of long-term contracts, equity gas fields and spot market purchases," said Kang Ryun-kwon, head of management planning at SK Innovation E&S. "As the volume we can secure through equity gas fields grows, our reliance on spot market purchases will decrease."

There are economic benefits as well. Spot market transactions offer flexibility but come with significant price volatility. Direct participation in a gas field project, as SK Innovation E&S has done, allows the company to secure LNG at a relatively competitive cost. Australia's proximity to South Korea compared with the Middle East also reduces the logistics burden of long-haul shipping.

The Barossa Project has also strengthened SK Innovation E&S's LNG value chain. Its entry into the existing portfolio has reinforced an end-to-end structure spanning upstream — the gas field and LNG plant — through midstream trading and shipping, to downstream power generation.

Building on its success at the Barossa gas field, SK Innovation E&S plans to extend its LNG value chain both domestically and internationally. The strategy goes beyond simply importing and selling LNG — the company aims to leverage its stable fuel procurement capabilities to connect power generation, industrial infrastructure and data centers as end-use customers.

A recent contract win illustrates the approach: the Quynh Lap LNG project in Vietnam. The project involves building a 1.5 GW combined-cycle LNG power plant and LNG terminal in the Quynh Lap district of Nghe An Province, about 220 kilometers south of Hanoi. Power generated at the plant is intended to supply nearby high-tech industrial complexes as well as AI data centers.

"If SK Innovation E&S successfully executes all elements of its LNG business — procurement, liquefaction, shipping and power generation — the foundation will be in place to emerge as a global LNG player within the next 10 years," Kang said.